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Egerton University-Kenya. Rural Financial Services in Kenya What is working and Why? -Betty Kibaara-. International Conference on Rural Finance Research Moving Results into Policy and Practice FAO Headquarters Rome, Italy 19-21 March, 2007.

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Egerton University-Kenya

Rural Financial Services in Kenya

What is working and Why?

-Betty Kibaara-

International Conference on Rural Finance Research

Moving Results into Policy and Practice

FAO Headquarters

Rome, Italy

19-21 March, 2007

Theme: Improvement in operational Management of Rural Finance Institutions

rural financial services in kenya
Rural Financial Services in Kenya
  • Formal organized commercial banks concentrated in the urban areas- in 1990’s most multinational banks closed rural branches
  • An array of informal financial systems created to fill the vacuum
  • Only 20% of the population have access to bank accounts in the rural areas.
  • Rural finance has been recognized and fast tracked under the Strategy for Revitalizing Agriculture
  • It is against this background that we conducted a research on selected rural finance models
presentation outline
Presentation Outline
  • State Owned/Government Model
  • Community Owned Model
      • Village Banks
      • Mbeu Savings Association ‘Bank under a tree’
  • Donor Credit Guarantee
      • Agricultural Input Stockists
      • Credit Input Supply Voucher System
  • Emerging Indigenous Banking Model
  • Beach Banking

Objective understand the operations, constraints, opportunities and possibility of replication

state owned government led model agricultural finance corporation
State Owned/Government Led Model: - Agricultural Finance Corporation-
  • Semi-government organization- budgetary allocation
  • Targets large scale farmers
  • Collapsed in the 1990’s and revamped in 2003
  • Offers, seasonal, developmental loans, value addition loans, and short term loans to agricultural input stockists

Challenge:-Loan Recovery, inefficiencies and financial sustainability

Opportunity to diversify from retail to Groups/Wholesale lending

donor credit guarantee model agricultural input stockist
Donor Credit Guarantee Model -Agricultural Input Stockist-
  • Model involves the Donor, an NGO, an input stockists and input Manufacturer.
  • Strengthen the creditworthiness of the agricultural input stockists who lack capital.
  • NGO trains the stockists and link them up with manufacturers/distributors of inputs-get inputs on credit
  • Donor guarantees to pay 50% of defaulted credit

Challenge: limited guarantee -$40,000

Scaling up: The model has attracted the Agricultural Finance Corporation Now lending short term credit ( Ksh. 150,000 to Ksh.500,000)

donor guarantee credit input supply voucher system
Donor Guarantee -Credit Input Supply Voucher System-
  • Provision of agricultural inputs using vouchers reduce diversion- in Ahero Rice Irrigation Scheme
  • Involves a donor guarantor, an MFI, Savings and Credit Co-operatives (SACCO), Input stockists, Government and the private sector
  • In 2005, disbursed Ksh. 6.7 million 600 farmers

Challenge: cohesiveness of all actors in the value chain

Opportunity exist for scaling up to other irrigation scheme

Replication: Already replicated in Bunyala Rice Irrigation Scheme

emerging indigenous banking model equity bank
Emerging Indigenous Banking Model -EquityBank-
  • Bank owned by locals
  • Principal- take banking services closer to the people after the multinational banks pulled away from the rural areas- FIXED and MOBILE BANKS
  • Rural clients account for 68% of clients
  • Low transaction charges –No ledger fee, take digital photo.
  • Total clients -1 million ( over 20% of all the total deposit accounts in Kenya)
  • Borrowing clients, 21%

Challenges : Infrastructure, insecurity

Replication: a number of banks have have set up rural branches e.g. Family Finance, Barclays bank and Kenya Commercial banks

community owned model financial service association village banks
Community Owned Model Financial Service Association ‘Village Banks’
  • Owned by the local community- membership through shares
  • Low densely populated areas
  • Managed by management companies- Krep Development Agency at a fee
  • Donor assistance with a clear exit strategy- Institutionalization and capacity building
  • 70 village banks, 70,000 savers, Ksh. 82 million shareholding
  • Proportion of client obtaining loan, 38%
community owned models mbeu savings association bank under the tree
Owned by the local community- membership through shares

Low densely populated areas-promoted by the church

One Management office in the city

4-5 credit officers - use Motor bikes to visit the groups

Offers savings, loans and money transfer

10,000 members, Ksh 30 million savings

% borrowing clients, 30%

Challenge: Insecurity, poor road infrastructure,

regulatory issues

Replication: other NGOs promoting the model

Community Owned Models -Mbeu Savings Association- ‘Bank under the tree’
beach banking model
Beach Banking Model
  • The model serves the unbanked fishermen along Lake Victoria beaches
  • Members formed a savings and credit Co-operative (SACCO), an MFI oversees its management.
  • 8 service points ‘bank’ along the lake- Savings and loan facility
  • Only 30% of the members borrow
  • Most innovative product are the Market Day Loans as low as US $ 3

Challenge: Migratory nature of fishermen, insecurity, regulatory

Opportunity: so far only serving 3,000 fishermen….potential 12,000

Replication: piloting along the coastal region

current scenario outreach no of clients and financial sustainability
Current ScenarioOutreach (no. of clients) and Financial Sustainability

Outreach frontier

High

Community owned

models

Village banks and Mbeu savings

Private commercial bank

-Emerging indigenous banks-

Outreach ( no. of clients)

Sustainability frontier

Beach banking

Credit input Supply Voucher System

Govt. led model:

AFC

Low

Low

Financial Sustainability

High

future scenario outreach no of clients and financial sustainability
Future ScenarioOutreach (no. of clients) and Financial Sustainability

Outreach frontier

High

Community owned

models

FSA and Mbeu savings

Private commercial bank

-Emerging indigenous banks-

Govt. led model:

FutureAFC

Outreach ( no. of clients)

Group lending

Beach banking

???

Govt. led model:

AFC

Credit input Supply Voucher System

Low

High

Low

Financial Sustainability

policy implication
Policy Implication
  • The government policy of the state financing is unsustainable in the long run. In addition, the state owned financing institution focus only on credit aspect.
  • Rural finance policy in most cases have addressed the issue of credit but lack of a savings facility is a bigger constraint than credit. Rural finance policy should be comprehensive.
  • Policy or intervention targeting only a single activity in the value chain such as supply of credit may have limited impact as compared to an intervention that target the whole value chain.
  • Policy interventions aimed at promoting the community owned models are likely to be successful and have greater impact.
  • Government should promote infrastructure to enable the private sector such as banks to penetrate the rural areas